Opec must keep production steady

April is the cruelest month of the year but not for oil prices. Given the circumstances of the world economic and financial crises and falling oil demand, it is amazing how oil prices are holding up.

The average current price of the Opec (Organisation of Petroleum Exporting Countries) basket of crudes is just under $49 (Dh179.9) per barrel and the month average is likely to be just over $50 per barrel. This is an improvement of about $4 on March average and $9 over February.

We must remember the market is still in the second quarter when oil demand is usually the lowest compared with other quarters. One explanation for this buoyancy is the fact that all governments around the world are doing everything they can to avoid further economic woes and therefore the market is buoyed by future expectation that may see at least the beginning of recovery by the end of the year.

Also Opec production may be going down gradually or holding steady. It was reported that Opec countries compliance with their production allocations is around 83 per cent as compared to 80 per cent in March. There are however over 720,000 barrels a day still to be reduced for Opec to get to its 24.9 million barrels a day (mb/d) overall production target.

The different forecasting groups are converging and further demand reductions for the 2009 forecast are now evident. In its latest forecast in April's Oil Market Report, Opec is forecasting oil demand for 2009 to be at a level of 84.2 mb/d, which is 1.4 mb/d lower than the 2008 level. This number is a revision of the group's forecast of one month earlier, which was indicating a reduction of 1.1 mb/d only.

The uncertainty about the world economy and the worsening situation in some countries and regions are forcing such revisions. While other agencies do not differ much on this forecast, Opec is taking a more prudent line with its forecast of non-Opec supplies at 55.4 mb/d, which is about 0.7 mb/d above 2008 level.

The IEA (International Energy Agency) however, believes that non-Opec supplies will be lower by 0.3 mb/d from the 2008 level due to the decline in investment forced by the reduction in oil prices and the lower production from biofuels for the same reason. All in all, to balance the market, Opec production has to be around 28.5 mb/d only as an average for the year. This is about 2.3 mb/d lower than 2008 level and is possible to achieve with the current Opec decisions in place.

There is of course the risk of stocks overhang as the level of stocks especially in the major industrial nations is higher than ever and the days of forward cover are at a very comfortable level. If consumers decide to use stocks instead of buying fresh supplies then oil prices could be put under pressure only to bounce later when stocks levels are down.

However, such action could be gradual and the important thing is for Opec to adhere to its production ceiling to prevent further stock overhang.

In the last few days, a new factor has entered the equation and that is the spread of swine flu and its likely impact on the demand for transportation fuels especially jet fuels. Its impact is also likely to reduce economic growth further and thereby one should not be surprised to see further revisions of oil demand downward. This will depend on the degree of alarm the disease is likely to generate especially if it takes epidemic proportions.

If Opec is satisfied with the current level of prices, it needs do nothing in its next meeting towards the end of this month.

Many ministers, particularly from the Arab Gulf region have indicated their preference for the prevailing price in order to help the world economy on its road to recovery. This has been evident from the statements coming out from the meeting of the Asian consuming and producing countries in Tokyo recently.

There may be other views calling for further reduction in production in order to boost prices to $70-80 per barrel, which is deemed necessary to support investment for future needs. But all of Opec will certainly like to be seen as helping the world economy to recover so that future demand for its oil will start growing again.

Given the above, it may be too early to be definitive about the likely Opec decision, but it is my view that Opec will make no further decisions on production and will only insist on its members to abide completely by their production allocations.

- The writer is former head of the Energy Studies Department at Opec Secretariat, Vienna.